23.9.14

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Eurozone Composite Signals Slowdown; French Private Sector Output Decline 5th Month; German Manufacturing Approaches Stagnation

Posted: 23 Sep 2014 09:53 PM PDT

French Private Sector Output Decline 5th Month

The demise in France continues. Markit reports French Private Sector Output Falls Further in September.
Key points:

  • Flash France Composite Output Index(1) falls to 49.1 (49.5 in August), 3-month low
  • Flash France Services Activity Index(2) drops to 49.4 (50.3 in August), 3-month low
  • Flash France Manufacturing Output Index(3) rises to 47.9 (45.8 in August), 4-month high
  • Flash France Manufacturing PMI(4) climbs to 48.8 (46.9 in August), 4-month high

The latest flash PMI data indicated a fifth consecutive monthly decline in French private sector output during September.

Underlying reduced activity was a drop in the level of new business received by French private sector firms during the latest survey period. Although slight, the reduction in new orders reversed a rise in August. Whereas manufacturers signalled a solid decline in new work, service providers registered a fractional fall. Panellists commented on subdued demand conditions both domestically and in certain export markets. Manufacturers recorded a drop in foreign orders for the fifth month running.

Employment in the French private sector continued to fall in September, extending the current period of job shedding to 11 months. Moreover, the rate of contraction quickened to the sharpest since February. Similar rates of decline were indicated in the services and manufacturing sectors.

Backlogs of work in the French private sector decreased for a fifth successive month in September, although the rate of contraction eased to a fractional pace. Slight growth of outstanding business at service providers was offset by a marked reduction of backlogs at manufacturers.

Comment:

Jack Kennedy, Senior Economist at Markit, which compiles the Flash France PMI ® survey, said: "French economic performance weakened in September, as a return to contraction of the service sector outweighed an easing rate of decline in manufacturing. Anaemic demand continues to hold back the private sector, with further price cutting insufficient to prevent new orders from falling. Firms responded to the continued weakness by lowering employment at the sharpest rate since February."
Eurozone Composite Signals Slowdown

Markit reports Flash Eurozone PMI Signals Further Waning of Growth.
Key points:

  • Flash Eurozone PMI Composite Output Index(1) at 52.3 (52.5 in August). 9-month low.
  • Flash Eurozone Services PMI Activity Index(2) at 52.8 (53.1 in August). 3-month low.
  • Flash Eurozone Manufacturing PMI(3) at 50.5 (50.7 in August). 14-month low.
  • Flash Eurozone Manufacturing PMI Output Index(4) at 51.0 (51.0 in August). Unchanged.

Euro area business activity grew in September at the lowest rate seen so far this year, according to the preliminary 'flash' PMI survey data.

At 52.3, down from 52.5 in August, the Markit Eurozone PMI™ Composite Output Index fell for a second month running, dropping to its lowest since December of last year. At 52.9, the average quarterly reading for the three months to September was also the lowest so far this year.

Inflows of new orders rose only modestly, with the rate of increase waning for the third successive month to register the smallest monthly improvement since August of last year.

Manufacturing fared worse than the service sector with the headline PMI falling to 50.5, its lowest since July of last year and edging closer to the 50.0 mark that signals stagnation. Although factory output grew slightly, new orders fell for the first time since June of last year. Employment was unchanged and prices charged by factories fell for the first time since April.

By country, faster growth in Germany, led by the service sector, was offset by an ongoing downturn in France and slowing of growth elsewhere in the region.

Comments

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

"The survey paints a picture of ongoing malaise in the eurozone economy. With growth of output and demand slowing, employment once again failed to show any meaningful increase. Such torpor meant prices continued to fall as firms fought for customers, which will inevitably heighten concerns that the region is facing deflation. "For a central bank hoping that the economic data flow will start to improve, the ECB will be disappointed by the ongoing weakness of the PMI. The survey data suggest GDP is on course to grow by 0.3% at best in the third quarter, buoyed by a 0.4% expansion in Germany but dragged down by stagnation in France and sluggish growth in the rest of the region."
German Manufacturing Approaches Stagnation

The Markit Germany Flash PMI shows Private sector growth maintained in September, but manufacturing edges closer to stagnation.
Key points:

  • Flash Germany Composite Output Index at 54.0 (53.7 in August), 2-month high.
  • Flash Germany Services Activity Index at 55.4 (54.9 in August), 2-month high.
  • Flash Germany Manufacturing PMI at 50.3 (51.4 in August), 15-month low.
  • Flash Germany Manufacturing Output Index at 51.1 (51.5 in August), 15-month low.

September data signalled a continuation of the ongoing expansion in German private sector output, as highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index rising slightly from 53.7 in August to 54.0. The current period of growth now stretches to 17 months and surveyed companies generally linked this to increased order intakes. However, the gap between manufacturing and services widened further in September. Production growth in the goods-producing sector slowed to a 15-month low, while service sector output rose at a slightly faster pace compared to August.

Comment:

Oliver Kolodseike, Economist at Markit and author of the Flash Germany PMI®, said: "September's flash PMI results paint a mixed picture of the health of the German economy at the end of the third quarter. Total private sector output continued to rise at an above average rate and employment growth picked up again, attributed in both cases to a strong service sector. However, new order growth slowed for a fourth month running and was the weakest in one year, suggesting that activity growth might slow in the near-term. "The introduction of a national minimum wage in January 2015 meanwhile weighed on service sector sentiment, with business expectations the lowest in nearly two years. "Moreover, recently weak manufacturing data have become one of the most conspicuous features of the fragility of a broad-based recovery. Production growth slowed further and new orders contracted for the first time in well over a year amid reports of a weakening economic environment. It remains to be seen if Germany's goods-producing sector is in the midst of a slowdown or whether recent poor data present just a temporary soft patch."
Soft Spot or Something Else?

I have been calling for a downturn in Germany for some time but it has not happened yet. However, the reports pretty much speak for themselves.


The near stagnation of German manufacturing coupled with contraction in France and a slowdown in growth elsewhere tells the story.

Germany cannot forever disconnect from the rest of the eurozone, especially France and Italy (Italy report not out yet but it is highly unlikely to be any good.)

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Battle for Perpetual War is Won; US Admits Attacks on ISIS Could Last Years; Expect an Accident

Posted: 23 Sep 2014 12:58 PM PDT

Victory Announced in Battle "for" Perpetual War

The warmonger dream of perpetual war has been won: US says Attacks on Isis Could Last Years.
The multiple airstrikes launched by the US and its Arab allies against Islamist militants in Syria were the "beginnings of a sustained campaign" that could last for years, the Pentagon said on Tuesday.

The airstrikes represent a dramatic volte face for a president who has spent three years battling pressure in Washington to get more involved in Syria and who was elected on a promise to bring the country's wars in the Middle East to an end.

The US separately bombed facilities controlled by the al-Qaeda affiliate Khorasan group in Syria, near Aleppo, after receiving intelligence it was planning "imminent" attcks on Europe and possibly the US, the Pentagon said.

The bombing of non-Isis militants angered some Syrian rebels groups who feared any Islamist group could be targeted, even if they had no intention of mounting attacks outside Syria, to the benefit of Bashar al-Assad's regime.

"We did not request the regime's permission. We did not co-ordinate our actions with the Syrian government. We did not provide advance notification to the Syrians at a military level, or give any indication of our timing on specific targets," said Jen Psaki, the state department spokeswoman.
No Permission, No Coordination, From "Natural Allies"

Syrian president Assad is fighting ISIS so is the US. Please consider Syria's Deputy Foreign Minister: We're 'Fighting the Same Enemy'
Syria has "no reservations" about U.S. airstrikes against ISIS and wants to team up with Washington to tackle the militants, the country's deputy foreign minister told NBC News.

Faisal Mekdad called Syria's President Bashar al-Assad "a natural ally" for the U.S. in its battle against ISIS, saying in an exclusive interview that both countries are "fighting the same enemy" and should be working together — not antagonizing each other.

"When it comes to terrorism, we should forget our differences… and forget all about the past," Mekdad said. "It takes two to tango...We are ready to talk."
Obama Threatens Assad if US Planes Downed

Ready to Talk? The US is not ready to talk.  Why talk when the battle for perpetual war has been won?

Instead Obama Threatens Assad if US Planes Downed in Syrian Airspace.
US President Barack Obama has threatened to wipe out Syria's air defense system and topple the Syrian government if President Bashar al-Assad ordered his forces to shoot American planes entering Syrian airspace.

He made the remarks during a meeting in the White House before his speech about Washington's strategy about the ISIL terrorist group, The New York Times reported on Sunday.

Obama ordered the US military on Wednesday to expand its bombing campaign against ISIL terrorists and launch airstrikes in Syria.

"If he [Assad] dared to do that, Mr. Obama said he would order American forces to wipe out Syria's air defense system, which he noted would be easier than striking ISIS (or ISIL) because its locations are better known," the newspaper said.

"He went on to say that such an action by Mr. Assad would lead to his overthrow, according to one account," the Times said.
Expect an Accident

  1. Assad has no interest in downing a US aircraft. Syria even offered cooperation (not that Syria had much to cooperate with - but at least the position of Assad towards ISIS is credible).
  2. The US responded with a credible threat to flatten Syria's air defense system.
  3. The only group happier than the warmongers with that prospect would be ISIS.
  4. Thus, the top priority of ISIS is now clear. Shoot down any US military aircraft.
  5. If ISIS can succeed or if something (even a friendly fire accident) happens to cause a US pilot to eject, the US will flatten Syria's air defense system.

Anyone smell an accident coming up?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Miracle Not Enough to Save Italy; Disruptive Eurozone Breakup Awaits

Posted: 23 Sep 2014 10:36 AM PDT

Analysis of what's happening and what to do about problems are two different things.

Financial Times writer Wolfgang Münchau provides an excellent example in Italy Debt Burden is a Problem For Us All.

Münchau's opening gambit is "We need extreme and co-ordinated policy to make it possible for Italy to ultimately stay in the eurozone."

Münchau states, "I think it is high time to address the consequences of failure with more clarity than is usually done. Put bluntly, Italy's economic position is unsustainable and will result in eventual debt default unless there is a sudden and durable change in economic growth. At that point, Italy's future in the eurozone would also be in doubt – and indeed the future of the euro itself."

High Time For Honest Assessment

Actually, it is indeed "high time" for something. What we need is an honest assessment from political leaders and euro puppets that the euro is doomed.

The flaws of the euro are well understood. I am 100% certain that Münchau could write a playbook on them with ease.

Münchau even admits that it would be "naive" to believe economic reforms can save Italy.

"The economic adjustment needed goes much beyond a few structural reforms. Italy needs changes in the legal system, it needs to bring taxes down to the eurozone average, and to improve the quality and efficiency of the public sector. It needs, in other words, to change the entire political system. Even that may not be enough."  

According to Münchau (and I wholeheartedly agree), Italy needs economic reform, a new legal system, lower taxes, less government spending, pension reform, and more productivity. And even that might not be enough! 

Nonetheless, to support his political beliefs, he seeks a miracle.

Miracle Requested

"I could see the ECB buying a wide range of debt instruments, starting with asset-backed securities and covered bonds as already announced. On top of that, it could buy other types of financial securities – bonds from the European Stability Mechanism, the eurozone's rescue umbrella, and from the European Investment Bank. The Commission could use the EIB to launch a big programme of infrastructure bonds. The best hope for Italy is that some of that trickles down into the real economy. I am optimistic that these programmes will have a noticeable positive effect on the eurozone as a whole, but much less certain of their effect on Italy."

Miracle Might Not Be Enough!

Münchau asks for that set of miracles from the ECB, yet is "less certain of their effect on Italy". Why? because "radical reform is not enough".

Note the irony in Münchau's conclusion "Italian debt sustainability requires policies at eurozone level that have so far been ruled out. This is where the eurozone's success or failure will be decided."

Eurozone Already Failed

Spain's unemployment rate is close to 25%. Its growth and unemployment prospects are nil.

Spain has no chance of meeting budget targets. Nor do France and Italy. Greece and Cyprus are in depressions. France is waiting on deck with problems as big as Italy's.

Any thinking person with an ounce of common sense he would readily admit the eurozone has already failed and it cannot and will not be revived by wishful thinking.

Miracles are not coming. However, there are choices, all of them unpalatable, to the eurozone nannycrat.

Eurozone Choices

1. Voluntarily dismantle the eurozone in the least destructive manner
2. Dismantle the eurozone by populist choice with huge financial disruptions
3. Suffer through decades of stagnant growth and extremely high unemployment

Option 4, pray for a miracle is not a logical choice.

Unless done voluntarily, it's easy to predict what will eventually happen: After suffering long enough in option 3, a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and declare all the bailouts and debt foisted on their country to be null and void. That person will be elected.

What to Do About It

No miracle that can keep the eurozone project intact. If Münchau was honest with himself, he would admit it.

The only thing that makes any sense to do is dismantle the eurozone, by choice, before someone like Marine Le Pen in France, Beppe Grillo in Italy, or an unknown person in Spain or elsewhere does it by force.

Disruptive Eurozone Breakup Awaits

Instead of seeking miracles that won't work and are not coming in the first place, how about an honest dialog on the best way to break up the eurozone?

Unfortunately, that will not happen because it is politically unacceptable.  A disruptive breakup of the eurozone awaits.

Addendum

Reader Marian states "If indeed Italy's problems are it's legal system, tax rates, quality and efficiency of the public sector, then simply dissolving the EU, even in an orderly way, would not address these fundamental issues."

Marian is of course correct! But why should the rest of Europe have to suffer with bailing out Italy when that approach cannot possibly fix the problem?

Can-kicking exercise only make the problem worse for all involved. By dissolving the eurozone, countries would be forced to address the real issues instead of praying for miracles from the ECB.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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